Risk Appetite in Banking - theirm.org

15 Pages·2012·0.53 MB·English

Risk
Appetite in
Banking
Steve Townsend
Tesco Bank
Agenda
1. Risk Appetite
2. How a bank fails - Capital & Liquidity Risk
3. Linking Risk Appetite to Strategy
4. Strategic Risk Measures
5. Capacity, Limits & Triggers
6. Stress Testing & Business Planning
7. Critical Success Factors & Challenges
Questions?
1. Risk Appetite
A Regulatory Requirement!
1.1 Risk Appetite Definition
Risk appetite is the level and type of risk a firm is willing to assume
‘
in its exposures and business activities, given its business objectives
and obligations to stakeholders
.’
.
Risk appetite is generally expressed through both quantitative and qualitative means and should consider
extreme conditions, events and outcomes. In addition, risk appetite should reflect potential impact on earnings,
capital and funding / liquidity.
2. How a bank fails
Not enough liquidity
Not enough capital
…… or both!
2.1 Capital Risk
Macro economics
Credit losses / Bad debts
Volumes
Margin erosion
Pension deficits
Rogue trading losses
2.2 Liquidity Risk
New bank: £10,000 capital Established bank: £10bn capital
1. Accepts Deposit £100k – 1. Accepts Deposits £100bn -
Instant Access Instant Access
2. Lends £100k mortgage for 25 2. Lends £90bn mortgage for 25 years
years
3. Retains Liquidity buffer £10bn
3. Depositor requests £100,000
withdrawal 4. Depositors request £15bn
withdrawals
5. Bank borrows £5bn
Bank can’t pay – insolvent Bank can pay – solvent
But no loss and £10,000 capital is intact Still no loss and £10bn capital is intact
3. Risk Appetite: Linking Risk Appetite to Strategy
Strategic Business Objectives
Profit
Customer
volatility and Regulatory Customer Group Scaleand
service& People/Values
return on compliance loyalty strength efficiency
products
capital
Customer
Experience
Strategic Risk Objectives
Financial Reputational Operations
Risk Risk & People
Acceptable Profit Volatility A positive stakeholder A fit for purpose,
& Financial Strength perception scalable operating model
Strategic Risks
Profit Financial MarkMeta rket Customer ReguRleagtuolartyor y 3rd Party & Process People Technology
Financial Strength
Volatility Strength ReputRaetpioutnat ionExperience ComCpolmiapnliacnece Outsourcing
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4. Risk Appetite: The Strategic Risk Measures
FINANCIAL RISK REPUTATIONAL RISK OPERATIONS & PEOPLE RISK
Profit Financial Market Customer Regulatory 3rdParty &
Process People Technology
Volatility Strength Reputation Experience Compliance Outsourcing
- Profit 1 in 20 - Debt rating - Change
- Capital ratios - Customer Retention - Staff Attrition
- Liquidity - Complaints - IT availability
- Regulatory engagement - Change
- Systems integrity
- Outsourcing/Suppliers
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5. Risk Appetite: Capacity, Limits & Triggers
Exposure
Capacity
Exposure
Limit
Exposure
Trigger
Exposure
Exposure
Risk Profile Risk Profile is Risk Profile Risk Profile is Risk Profile is
significantly within appetite approaching outside appetite outside Capacity
lower than appetite limit
appetite
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